Morning Note: A Busy Results Day (Visa, Microsoft, Alphabet, Reckitt, Heineken, and Assa Abloy).

Market News

US markets were broadly stronger on Tuesday: S&P 500 (+0.7%); Nasdaq (+0.9%). Asian stocks pushed higher after Xi Jinping stepped up support for China’s economy, buoying optimism: Nikkei 225 (+0.7%); Hang Seng (+0.7%); Shanghai Composite (+0.4%). The FTSE 100 is currently little changed at 7,389.

Country Garden defaulted on a dollar bond for the first time. The distressed Chinese developer’s failure to pay interest on the note within a grace period that ended last week “constitutes an event of default,” its trustee’s notice said.

Deutsche Bank may accelerate payouts after corporate banking income and deposit inflows offset weaker trading in the third quarter. Sales met estimates, putting it on track to reach about €29bn this year. The CFO said job reductions would be a part of cost-cutting measures.

Hong Kong plans to cut the stamp duty on stock trading to 0.1% from 0.13%, Chief Executive John Lee said. The city will also halve the purchase tax for second homes to 7.5%.

House Republicans nominated Trump ally Mike Johnson of Louisiana as their latest choice for speaker. Earlier, Tom Emmer ended his bid after Trump came out against his candidacy.

Blackstone is in talks with lenders about the future of a LA office complex, once valued at $583m, after having written down its entire stake in the property, a person familiar said.

Source: Bloomberg

Company News

Yesterday evening, Visa released results for the three months to 30 September 2023, the final quarter of its FY2023 financial year. The figures were better than expected and the group issued upbeat guidance for FY2024. In response, the shares were marked up 2% in after-hours trading post the announcement.

Visa is the world’s largest electronic payments network. It connects over 15,000 financial institutions, 80m merchant locations, and 4.3bn cards. Visa is not a bank; it doesn’t lend or take on credit risk. It doesn’t issue cards or place the terminals at the merchant locations. Instead, the company earns a small fee from more than 200bn transactions processed on its network to generate annual revenue of more than $32bn.

The company is benefiting from the ongoing shift from cash and cheques (which still amounts to c. $18tn, growing at 2% p.a.) to electronic means of payment, and the growth of online retail, contactless, and mobile payment systems. We believe the industry is at an inflection point in terms of sales growth driven by the global proliferation of smart devices which provide a way to pay and to be paid. In emerging markets, a lack of physical communication infrastructure traditionally provided a barrier to payments growth, but that has been removed by the emergence of mobile phone technology and a government focus on digitalising cash to reduce the black economy.

During the three months to 30 September, Visa enjoyed another good quarter, reflecting stable business trends. Consumer spending remained resilient, driving growth in payments volume (+9%), and processed transactions (+10% to 56bn). Cross-border volume continued to be a tailwind (+16%), fuelled by travel growth from the ongoing recovery and summer tourism. The group enjoyed continued growth across its new flows and value-added services businesses.

Net revenue grew by 10% on a constant currency basis, to $8.61bn, a touch above the market expectation of $8.55bn. For the full year, revenue grew by 13% to $32.7bn. Revenue in the final quarter was made up of service revenue (based on prior-quarters payment volume, 12% to $3.9bn); data processing (13% to $4.3bn); international transaction revenue (10% to $3.2bn); and other revenue (35% to $744m). Client incentives, a contra-revenue item, were $3.4bn or 28.5% of gross revenue.

The group continued to keep a tight rein on costs – operating expenses were up 9%, primarily driven by increases in personnel and general and administrative expenses. Adjusted EPS was up 21% on a constant currency basis, to $2.33, above the market expectation of $2.24. Full year EPS rose by 17% to $8.77.

The group’s balance sheet remains strong, with cash, cash equivalents, and available-for-sale investment securities of $22bn at the end of September. The main capital allocation priority is to invest to grow the business, both organically and via acquisition. Visa also has an ongoing commitment to return excess cash to shareholders. The group has a record of strong dividend growth, with the latest quarterly payout raised by 16% to $0.52. During the year, the company also bought back $12.4bn of its stock and has authorised a new $25bn multi-year repurchase authorisation.

We believe the long-term growth prospects for Visa remain very attractive, more so given the acceleration in recent years in the shift to e-commerce, tap-to-pay, and new digital payments, and in the number of acceptance points at SMEs. In addition, the broad application of digital payments by businesses and government provides a huge market opportunity.

The group has provided strong guidance for the financial year to 30 September 2024: low double-digit revenue growth on a constant dollar basis (vs. current consensus of 11%) and low teens EPS growth.

In the near term, while some short-term uncertainty persists, the group remains confident in its ability to execute its strategy and expand Visa’s role at the ‘centre of money movement’. Persistent inflation and the ongoing shift to digital payments also provide a tailwind to growth, although a slowdown in overall consumer spending could be a drag. However, the company has previously said that if we do go into a recession, Visa is now stronger in debit – the card of choice in tougher times – than it was in the 2008/09 financial crisis. The group also highlights that if there is a recession, they have plenty of additional cost levers to pull.

The other moderate uncertainty is the fact that both the CEO and CFO are relatively new in their roles. However, we don’t expect to see any shift in the group’s core growth strategy as a result of the changeover.

Finally, Visa is currently engaging shareholders regarding a potential exchange offer related to their Class B shares. At the time of the IPO in 2008, Class B shares were held by US banks and Class C by international banks to cover the potential costs arising from litigation with US retailers. With the value of its shares up massively and ‘significant progress’ on the lawsuits, Visa believes it’s the right time to amend the share structure. The 390m Class B shares are currently worth $94bn (19% of the total of the market cap). If the proposed exchange goes through, half of this would be free for sale in the market over a 90-day period (a third within the first 45 days and up to two thirds up to 90 days). The other half could potentially be sold over at least three years. This could potentially provide a share price overhang, although Visa could step up its share repurchase programme. Note all the share classes are in the diluted share count, so this event does not impact earnings.

Source: Bloomberg

Last night, Alphabet released quarterly results which were ahead of market expectations. However, growth in the cloud business was slightly below par and the shares were marked down 4% in after-hours trading.

Alphabet is the public holding company for Google, one of the world’s most recognised and widely used brands. In addition to the core search engine, the group owns digital video platform YouTube, web browser Chrome, mobile operating system Android, Gmail, Google Maps, Google Cloud, Fitbit, and autonomous driving company Waymo, among others.

The group has a strong track record of innovation, leaving it well placed to capitalise on a wide variety of technological themes, such as digital media, e-commerce, video advertising, the cloud, the internet of things, driverless cars, and artificial intelligence. We believe the shift to internet-connected devices (including usage outside the home) and streamed TV means the growth of advertising dollars on Google Search and YouTube has much further to run. Machine learning capabilities should also help advertisers get higher return on investment and encourage them to continue to allocate their advertising budgets to Google.

The company has six products with more than two billion users each and another nine with more than 500m users, most of which are far from being fully monetised. The group’s structure allows it to own a portfolio of businesses with different time horizons, while its broad offering provides a competitive edge. Capital allocation is strong and spread across internal R&D, accretive M&A, and massive shareholder returns.

In the three months to 30 September, revenue grew by 11% on a constant currency basis to $76.7bn, slightly above the consensus forecast of $75.9bn. Growth was a touch higher than the 10% expected and ahead of the 9% generated in the previous quarter. The main drivers were meaningful growth in Search and YouTube, and momentum in Cloud.

The group reports its results across three segments: Google Services, Google Cloud, and Other Bets. Google Services is the largest division (89% of revenue), generates revenue primarily from digital advertising and the sale of apps, digital content products, hardware, and YouTube subscription fees. During Q3, Google Services revenue grew by 11% to $68.0bn, versus 5% in the previous quarter.

Google Search (which accounts for 74% of ad revenue) increased by 11%. Advertising from Google Network Members’ websites (13% of ad revenue) fell by 3%. The group separates out YouTube, which accounted for 13% of ad revenue in the quarter and grew by 12%.

Other sales within the Services division include Play, content products, hardware, service, licensing fees, Nest, and YouTube’s non-advertising revenue. They grew by 21% in the quarter to $8.3bn.

Traffic acquisition costs (TAC) are the fees Google pays to other companies (such as Apple) to carry its search service and adverts (i.e., cost of sales). During Q3 they grew by 7% and currently account for 21.2% of advertising revenue. Looking forward, it is unclear whether TAC will increase as the search distribution market becomes more competitive and the impact this may have on margins.

Google Cloud includes Google’s infrastructure and data analytics platforms, collaboration tools, and other services for enterprise customers. Fee revenue comes from Google Cloud Platform services and Google Workspace (formerly known as G Suite) collaboration tools. In Q3, Cloud saw a slight deceleration in growth (+22% to $8.4bn) versus $8.6bn expected by the market and below the first-half growth rate (+28%) as customers cut back slightly. Although the group continues to invest to grow the cloud business, the division turned another quarterly profit ($226m), compared to a loss of $440m last year.

The group’s Other Bets division (less than 1% of revenue), which is effectively an incubator fund for new products and technologies, saw its quarterly loss shrink slightly to $1,194m.

Given the uncertain backdrop, Alphabet is looking at all aspects of its cost structure and focusing investment on its highest growth priorities to deliver long-term, profitable growth. The group is ‘meaningfully’ slowing the pace of recruitment and taking actions to optimise its global office space and use AI to increase business productivity. The overall aim is to improve efficiency by c. 20%. The number of employees fell by 2%, although with more than 70k taken on in the last three years, there is clearly more the company can do.

In the latest quarter, group costs and expenses increased at a slower rate than revenue (+7%). As a result, margins expanded from 24.8% to 27.8%. EPS grew by 46% in the quarter to $1.55, better than the consensus forecast of $1.45. 6c of the beat was due to the impact of the change in useful lives of the group’s server and network equipment.

Alphabet generated strong free cash flow of $22.6bn in the quarter, despite ongoing spend on R&D and capex, while its huge cash pile (including marketable securities) standing at increased to $120bn. This has allowed the group to significantly increase its capital return to shareholders – buybacks currently use up around three quarters of free cash flow. During the quarter, the company bought back $15.8bn of its shares as part of its $70bn repurchase programme.

Although advertising is cyclical, we believe Google will show relative resilience as advertisers, evaluating the effectiveness of their budgets, migrate to platforms with the most scale, measurability, and demonstrable return on investment.

Regulators are increasingly focused on the depth and form of user data that are collected and used to target ads. As a result, political/regulatory risk remains fairly elevated, with the potential for large fines, forced changes to business practices, or a break-up. However, we believe any action could be years away.

AI remains a hot topic. We believe the Alphabet is well placed – the company has been incorporating AI functionality into its search capabilities and other products for years and is expected to launch a steady stream of innovation in the future. Furthermore, Google’s position in cloud services – it is one of the big three public providers – leaves it well placed to provide the infrastructure and computing power needed by AI, while the group’s user scale and usage frequency supports a wealth of data, providing another competitive advantage.

Looking forward, although the economic outlook will remain a headwind in the near term, the group is facing easing year-on-year comparatives as we go through 2023. Alphabet continues to trade on a valuation (20x ex-cash) below most of the other tech majors and at a level we believe is very attractive for a company exposed to several areas of long-term secular growth.

Source: Bloomberg

Last night, Microsoft released results for the three months to 30 September 2023, the first quarter of its financial year to June 2024, which were well ahead of market expectations. The group also provided robust guidance for the current quarter. In response, the shares were up 4% in after-hours trading.

Microsoft is a global leader in consumer and enterprise software, services, devices, and solutions, leaving it well placed to benefit from the ongoing shift to digital technology and several other secular trends. In an inflationary world, digital technology provides a deflationary force to help business offset cost pressures elsewhere. The group’s competitive edge lies in the strength and breadth of its portfolio of resilient and trusted technology which provides unique integration of its cloud-based products and services, covering productivity apps, infrastructure services, security, and communications. The group’s offering includes Windows, Office, Skype, Hotmail, LinkedIn, Bing, GitHub, Surface, Xbox, and OpenAI ChatGPT. Not only are the group’s products designed to work together but it is also more economical to bundle multiple products together.

Its portfolio is being continuously enhanced through in-house product development and acquisitions, allowing the company to push through price increases and sell new products and services to a growing base of consumers – in the past few years, gaming, security, and LinkedIn, have all surpassed $10bn in annual revenue. In addition, as one of the world’s three largest cloud companies, Microsoft Azure is benefitting from the migration of workloads from on-premise to public cloud platforms, a transition that we believe has a long way to go. With its stake in OpenAI and its agreement to be their exclusive cloud provider, Microsoft is well placed in the world of AI. Most recently, the group has released the Microsoft Windows Copilot, the AI assistant tool.

The group has shifted to a user subscription model which generates a visible, long-term annuity revenue stream with higher margins and strong cash flow. In FY2023, the group generated revenue of almost $212bn (up 11%), gross margins of 69%, and operating margins of 42%. Microsoft has a very strong balance sheet and in addition to reinvesting cash back into high growth opportunities and M&A, the company has consistently increased its dividend and repurchased its own shares.

During the latest quarter, revenue grew 12% at constant current (CC) to $56.5bn, 4% above the consensus forecast of $54.5bn. Productivity & Business Processes generated revenue of $18.6bn, up 12%, driven by Office 365 Commercial (+17%) and Dynamics 365 (+26%). Intelligent Cloud generated revenue of $24.3bn, up 19%, driven by Azure (+28%). Microsoft Azure’s is outperforming the other cloud providers due to its greater exposure to enterprise and hence, potentially more resilience, and its Azure’s better positioning around AI workloads. More Personal Computing generated revenue of $13.7bn, up 2%, with growth in Xbox content and services (+12%) and search and news advertising (+9%), partly offset by a decline in devices (-22%).

The gross margin increased from 69% to 71%, driven by the improvement in Azure and Office 365, as well as sales mix shift to higher margin businesses. Operating expenses only grew by 1% and, as a result, the operating margin rose by five points to 48%. EPS grew by 26% at CC to $2.99, well above the market forecast of $2.65.

The group generates very strong free cash flow, up 22% to $20.7bn in the quarter, leaving net cash of c. $72bn. The company is authorised to repurchase up to $60bn in shares, with $3.6bn bought back in the latest quarter. The company also paid out $5.6bn in dividends.

On the analysts’ call, the group provided guidance for the current quarter including Activision Blizzard (the video gaming company) from 13 October. Bookings growth is expected to be relatively flat. By division, revenue in Productivity and Business Processes is expected to grow by 11%-12% and Intelligent Cloud by 17%-18% (including Azure, 26%-27%).  The group continues to expect full-year operating margins to remain flat year-over-year.

We believe in the current environment the company faces a relatively lower level of political risk and should prove more defensive during the current economic uncertainty.

Source: Bloomberg

Reckitt has today released its Q3 results. The performance was in line with expectations, although the mix was slightly different, and guidance for the full year has been maintained. Following the appointment of its new CEO on 1 October, the company has announced a strategy update and the commencement of a share buyback programme. The main negative is the dropping of the medium-term margin target. In response, the shares are down 2% in early trading.

Reckitt is a global leader in health, nutrition, and hygiene. Trusted brands, such as Dettol and Lysol, are well placed to benefit from the shift to healthier and more hygienic lifestyles. To help ease the pressure on state-funded healthcare systems, we expect to see a transition to self-care and growth of over the counter (OTC) brands such as Mucinex, Nurofen, and Gaviscon, all of which are owned by Reckitt. A greater focus on immunity, mental health, and overall well-being is expected to drive growth of the group’s preventative treatments, such as vitamins, minerals, and supplements (VMS).

New CEO Kris Licht was an experienced internal appointment who took up his position on 1 October. He highlights that the group operates in ‘attractive growth categories’ which should deliver sustainable mid-single digit like-for-like (LFL) net revenue growth over the medium term. The group will continue to invest in product superiority and will extend its productivity programme to focus on fixed costs to fuel both growth and earnings. As a result, adjusted operating profit is expected to grow ahead of net revenue in the medium term – the company has dropped its ambition to achieve a mid-20s margin by the mid-2020s. Strong free cashflow generation and a healthy balance sheet will finance sustainable dividend growth and a share buyback, with a new 12-month £1bn programme commencing imminently. As expected, the new CEO has gone for strategic continuity, although the change to the margin target is disappointing.

During Q3, reported revenue fell 3.6% to £3.6bn, including a currency headwind (-6.8%) and disposals (-0.2%). Stripping out these impacts, LFL growth was 3.4%. This compares to the 6.0% generated in the first half and reflects the tougher year-on-year comparatives. However, it was in line with the +3.5% expected by the market.

Growth was driven by price/mix (+7.5%) benefitting from strong carry over pricing from H2 2022 as the group sought to pass on higher input costs. The group highlights that getting price increases through has been made easier because of strong product innovation. Volume fell by 4.1%, a slight improvement on the 4.4% decline in the first half.

By division, Hygiene grew by 8.1% in LFL terms, to £1,547m, better than expected. The unit enjoyed broad-based growth across all core categories, driven by double-digit growth in Finish and Vanish. Lysol grew by mid-single digits.

Health was up 5.4% to £1,482m, in line with expectations. Growth was driven by OTC and Intimate Wellness portfolios. Dettol was broadly stable following its mid-single digit decline in H1.

Nutrition fell by 11.9% to £571m, below market expectations as the business lapped tough prior-year comparatives due to the US competitor supply issue. However, the business maintained market leadership.

As expected at this stage, the group hasn’t provided an update on its financial position. At the half-year stage in July, the group said it expects to deliver free cashflow of over £2bn in 2023, with financial gearing below 2.0x by the end of the year. As highlighted above, the group is committed to returning excess cash to shareholders, and has announced a new share buyback programme.

The group highlights that it remains firmly on track to deliver its full-year targets despite some tough prior-year comparatives it continues to face in the US Nutrition business and across the OTC portfolio in the fourth quarter. The targets are LFL net revenue growth of 3%-5% and an adjusted operating margin slightly above 2022 levels when excluding the one-off benefit of circa 80bps in 2022 related to US Nutrition. Within the guidance, the group still expects to significantly increase marketing spend to support an exciting innovation programme in 2023. 

Source: Bloomberg

Assa Abloy has today announced its Q3 results that were slightly better than expected. Ahead of the analysts’ call, the shares are up 2%.

Assa Abloy is the global leader in access solutions, with a portfolio of well-known global and local brands, such as Yale, Union, and Lockwood. Products include doors, sensors, locks, alarms, fencing, gates, and identity systems. The key long-term drivers of the industry are increased demand for security; growing urbanisation; increased emerging market wealth; the shift to new digital and electronic technologies; the development of sustainable buildings to meet climate change objectives; and changing market regulations. Furthermore, one of the legacies of the pandemic is likely to be a shift towards touchless (hygienic) activation points, automated doors, and location services, which also provide recurring revenue from licenses and software. As the brand leader in most markets, with a large installed base and strong distribution channels, we believe Assa Abloy is well placed to take advantage of these trends.

The long-term financial target is to generate annual sales growth of 10%, half organically and half from acquisitions, and to earn an operating margin of 16%-17% over the business cycle. The aim is to generate SEK 25bn of profit from SEK 150bn of sales by 2026. The group has previously said it needs to generate organic top-line growth of 3% to offset inflation and drive the margin forward, although clearly more is currently needed to recoup recent raw material cost increases. The group has a strong track record of innovation and aims to generate 25% of sales from products launched in the last three years.

A ninth Manufacturing Footprint Program (MFP9) is currently underway to further increase efficiency and optimise operations. The group recently increased its target savings from SEK 0.7bn to SEK 0.8bn (4%+ of operating profit), of which SEK 0.4bn should be generated in the second half of 2023. In addition, expects to realise SEK 0.9bn in short-term cost reductions.

In the three months to 30 September, net sales rose 16% to SEK 36.9bn. In organic terms, which strips out the impact of acquisitions & disposals (+11%) and currency (+4%), sales grew by 1%. Growth was below the 3% generated in the previous quarter, with the sequential deterioration mainly attributable to tougher year-on-year comparatives and a smaller impact from the carry over effect of pricing actions. However, the result was better than the market forecast for a slight decline and was despite weak residential construction markets. Growth was split between price (+3%) and volume (-2%) as the group continued to recoup higher material costs.

By business division, Global Technologies and Americas delivered good organic sales growth of 4% and 3%, respectively. Global Technologies was primarily driven by strong growth in Global Solutions and the US non-residential business was the main driver for Americas growth. Organic sales in Entrance Systems were stable (%) with sales growth in all business segments except the Residential segment. EMEIA reported negative organic growth of 3%, mainly due to weakness in the Nordics. Asia Pacific organic sales declined 7% due to negative internal sales growth and continued soft demand in China.

The operating leverage of the business was ‘very strong’, driven by lower direct material costs, continued operational efficiencies, and pricing. Price/cost is now in positive territory. Adjusted operating margin excluding large acquisitions and divestments (see below) rose from 15.6% to a record high of 17.4%. As a result, operating income grew by 16% to SEK 5.8bn, while EPS rose by 3% to SEK 3.31.

Operating cash flow was up 59% to SEK 7.2bn, with the cash conversion rate at 147%, as working capital improved compared to last year in combination with the increased earnings. The group’s financial position remains robust, although net debt to EBITDA rose from 1.4x to 2.6x following the completion of the HHI deal (see below). Looking forward, gearing is expected to fall rapidly thanks to strong free cash flow generation.

Earlier in the year, the group completed the $4.3bn acquisition of the HHI division of Spectrum Brands. As part of the regulatory process, Assa Abloy agreed to sell assets in North America for $800m. The company believes HHI has strategic logic – it fills a gap in its US residential business – and has said the business is performing in line with expectations. The integration process is ongoing as the group starts to realise synergies of around $100m within a five-year period.

Elsewhere, the M&A activity remained buoyant with 10 deals signed in the quarter with combined annual sales of SEK 2bn. Earlier in the month, the group has announced the acquisition of Securitech Group, a manufacturer of high-security mechanical and electronic door hardware products in the US. Last year, the business generated sales of SEK 160m with a ‘strong’ operating margin. The deal pipeline remains strong, and despite the large HHI acquisition, the group still plans to make its usual 15-20 acquisitions per year.

Assa Abloy doesn’t usually provide guidance. Macro-economic and geopolitical uncertainties remain, with residential construction experiencing a difficult period, particularly in Europe. However, Assa has previously said that during both the global financial crisis in 2008/09 and the pandemic, its decentralised operational model and agile cost base provided flexibility. In that regard, and considering the lower residential construction levels, as we highlight above the group has implemented short-term cost measures to protect profitability. In addition, the group’s large exposure to after-market service and its structural pricing power leaves the business better positioned to navigate through these uncertain times.

Source: Bloomberg

Heineken has this morning released its Q3 results and maintained its full-year guidance. Ahead of this afternoon’s analysts’ meeting, the shares are up 2%, and at a valuation similar to the pandemic induced 2020 low. Although near-term trading remains challenging, we believe this does little to affect the long-term value of the business.

Heineken is the world’s second largest brewer, generating sales of €22bn from a portfolio of iconic brands, many of which have been quenching the thirst of consumers for decades. In addition to the core Heineken brand, the company owns several well-known beers and ciders, including Sol, Tiger, Amstel, and Strongbow, as well as 300 or so local brews. The company also owns around 3,000 pubs in the UK, runs a wholesaling operation in Europe, and has a strong global distribution capability. Over time, the group has expanded and developed its global footprint through investment in new breweries, partnerships, and acquisitions. Most recently, the group completed the purchase of Distell and Namibian Breweries, adding more than €1bn in revenue and €150m of operating profit to its African footprint.

We believe the company is well placed to benefit from long-term growth opportunities in emerging markets (which generate 70% of group profits), where young and growing populations, low per-capita beer consumption, and increased wealth are expected to drive growth.

The group generates more than 40% of its revenue from premium brands, where volume is growing twice as fast as mainstream beer because consumers turn to better brands as they grow older and wealthier. Finally, the group is benefiting from the growth of low and no-alcohol products and is exploring markets ‘beyond beer’ such as cider, wine, seltzers, and flavoured malt beverages. Heineken is aiming to generate a greater level of growth from price increases and mix (relative to volume), while productivity and capital efficiency is being increased, with at least €2bn of cost savings expected by the end of 2023 and €400m p.a. thereafter. The overall aim is to ensure the internal pace of change within the organisation matches to pace of external market change.

We believe the shareholding structure, supported by family ownership, ensures the company is run for the long term and in the best interests of all shareholders.

However, in the near term, the group has faced a challenging and volatile environment. Today, the group highlights it is seeing a gradual improvement in business performance, although somewhat slower than its ambition. In half of its markets, volume trends are improving, while in just over half of its markets, Heineken is gaining or holding market share.

In the third quarter, net revenue grew by 4.5% on an organic basis to €8.0bn, a slowdown from the 6.6% growth generated in the first half. Growth was driven a 9.7% increase in net revenue per hectolitre, as pricing was used to offset unprecedented input and energy cost inflation. However, this had an impact on total consolidated volume which fell by 4.8%. The underlying price-mix was up 9.5%, driven by pricing for inflation and by premiumisation. Beer volume fell by 4.2% in organic terms in Q3.

Business performance in Europe (+3.9%) was mixed. Following the impact of adverse weather in July and August, trends improved in September and the group gained share in the majority of its markets in the on-trade, with more to do to recover in the off-trade. Asia Pacific (-0.9%) improved sequentially, despite ongoing challenges in Vietnam.

Africa, Middle East and Eastern Europe (+9.6%) was impacted by volume declines in Nigeria and South Africa, with volume down 8.6% and price up 19.5%. Finally, the Americas region (+5.5%) and the group returned to volume growth, with strong performances in Brazil and Mexico.

The group continues to benefit from an ongoing shift towards product premiumisation, although premium beer volume fell by 5.7% in Q3, mainly driven by Vietnam and the group’s exit from Russia. Outside these markets, premium beer volume was only down 2.0%. The Heineken brand itself grew volume by 2.3%. Heineken Silver was up 40%.

In the low & no-alcohol category, Heineken 0.0 saw continued momentum, up 3.5%. The group’s e-commerce platforms continued to grow, with gross merchandise value captured via B2B digital platforms up 22% to €8bn.

The reported net profit for the first nine months of 2023 was down 12.5% to €1,924m. Heineken has a strong balance sheet. At the end of June, financial gearing rose to 2.7x net debt to EBITDA, driven by the impact of the purchase of FEMSA’s stake in the company, slightly above the long-term target to be below 2.5x, which it expects to return to by the year-end.

The dividend policy is to pay a ratio of 30% to 40% of full-year net profit, with half-year interim payment fixed at 40% of the total dividend of the previous year. As a result, in August, the group paid €0.69 per share, up 38%.

Looking forward, whilst inflation-led pricing is tapering, the company observes a slowdown of consumer demand in various markets facing challenging macro-economic conditions. The company still expects stable to mid-single-digit organic growth in operating profit, a target that was reduced in the summer.

Looking further ahead, the group believes unprecedented commodity and energy cost inflation in recent years will be partially reversed next year, easing the pressure on pricing. Together with the structural changes the group is making, management is confident this will set Heineken up for a balanced growth delivery in 2024.

Source: Bloomberg